Financial Leverage: Definition, Formula & Calculation


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question 1 of 3

Financial leverage increases returns to:

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1. Math time! If a company has $20,000,000 in assets and its total common equity is $16,000,000, the company's equity multiplier is?

2. More math! If a company has a return on investment of 31.25% and an equity multiplier of 1.6, the return provided to common stockholders is?

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About This Quiz & Worksheet

This quiz and worksheet combo will test you on some basic concepts related to financial leveraging. For the quiz, you'll need to be able to explain how financial leverage works, understand the risks associated with financial leveraging, and calculate the equity multiplier and return to common stockholders.

Quiz & Worksheet Goals

These assessment tools will test you on the following:

  • How financial leverage works
  • What information the equity multiplier provides
  • The formulas for the equity multiplier and return to common stockholders

Skills Practiced

  • Critical thinking - apply relevant information to examine information about financial leveraging in a different light
  • Problem solving - use acquired knowledge to solve equity multiplier and return to common stockholders practice problems
  • Interpreting information - verify that you can read information regarding financial leverage and interpret it correctly

Additional Learning

To learn more about financial leveraging, check out the accompanying lesson, Financial Leverage: Definition, Formula & Calculation. The lesson contains the following objectives:

  • Describe financial leverage
  • Identify the ways in which companies can finance their assets
  • Learn how to calculate return on investment
  • Understand how to evaluate financial leverage with respect to interest and dividends
  • Define benchmark